Friday, August 05, 2011

That S&P Downgrading

It's kinda hilarious:
The federal government is expecting and preparing for bond rating agency Standard & Poor's to downgrade the rating of U.S. debt from its current AAA value, a government official told ABC News.


Reasons behind the possible downgrade, the first official said, would be the political confusion surrounding the process of raising the debt ceiling and lack of confidence that the political system will be able to agree to more deficit reduction.
According to a source, Republicans refusing to accept any tax increases as part of a larger deal also likely would be part of the reason cited.
The first official was unsure if the bond rating would drop to AA+ or AA.
It was lowered to AA+. The rationale is, as you would expect, kept a bit fuzzy:
We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.
But I think this is a good warning that the kind of temper tantrums and extortion the Republicans employed (and promised to employ again in the future) didn't go down terribly well with the rating agency.

Of course this particular rating agency has a pretty blotched escutcheon, itself.
Added later: Two explanations which delve deeper into this, one by Paul Krugman, one by Yves Smith.